Tag: Patent Law

The Chinese government has strongly encouraged patent application and patent protection in the past decade.[1] As a result, China contributed 89% of the worldwide growth in patent applications in 2014, whereas the United States contributed 6%.[2] Statistics from the World Intellectual Property Organization (WIPO) show that China has received the most patent applications since 2012 and that Chinese domestic patent applicants are filing more applications than applicants from any other country.[3] This Paper introduces how third parties, referring to various types of patent service providers, are involved in the increasing patent market of China.

The WIPO statistics show that only a fraction of Chinese patents were filed abroad and that most of the patents only enrolled one foreign country, which indicates that the patents filed by China’s domestic applicants do not have a very wide geographical coverage.[4] This may also imply that the average quality of Chinese patents is still low.[5]

Empirical evidence confirms this inference of low quality;[6] still, some scholars believe there is a trend of Chinese patent applicants improving the quality of the patents.[7] This Paper discusses the difficulties, such as moral hazard, created by the different quality of patents in innovation commercialization, especially in patent transactions and patent financing, and how Chinese patent law exacerbates the difficulties. The goal of this Paper is to encourage third parties to rethink their service for overcoming these difficulties.

Section II introduces the main categories of patent services provided in China. Section III discusses the problems of the patent service and the paradox of promoting patent transaction and patent financing by policies and patent law. Section IV suggests the opportunities for patent service providers in China.

II. Background: Service Map of the China Patent Market

Most patent applicants are represented by a registered patent agent when they apply for patents.[8] Patent agents facilitate patent applicants by drafting patent applications and dealing with patent prosecution, such as conducting a prior-art search, drafting and filing patent applications, and answering examiners’ questions.[9] As the number of patent applications increases in China, the demand for patent procurement also increases.[10]

The State Intellectual Property Office of the People’s Republic of China (SIPO) received 6.06 million (utility) patent applications from domestic applicants in 2016.[11] The statistics by the All-China Patent Agents Association (ACPAA) show that China had 1,457 patent agencies and 14,795 patent agents in 2016.[12] One patent agent deals with an average of eight new patent applications every month, which is much higher than the rates in the United States, Japan, and Korea,[13] which suggests an insufficient supply of patent procurement in China.[14]

At the same time that the number of patent agents has been increasing in China, the average level of their education has also been increasing. In 2013, 29% of Chinese patent agents held a master’s degree and 3% of them held a Ph.D. degree.[15] In the first-tier cities of China, such as Beijing, Shanghai, and Guangzhou, most patent agents held a master’s degree.[16] Peking University Law School even established a graduate training program for patent agents.[17]

After patents are granted, they can be deployed to secure financing as intangible assets.[18] For example, patentees can invest their patents for firm shares.[19] Statistics by SIPO show that 34.3% of patents produced by universities are assigned to firms as investments in 2013.[20]

It is also common to use patents as collateral for loans in China. Loans of 25.4 billion RMB were collateralized by patents in 2013 and increased to 48.9 billion RMB in 2014.[21] Moreover, China’s patent market also provides patent insurance in more than fifty cities.[22] Even though some international insurance carriers, such as AIG, IPISC, and Willis, have developed some mature patent insurance policies, the patent insurance policies provided in China do not exactly follow those carriers since patents are “jurisdiction-specific.”[23] Two major types of patent insurance provided in the Chinese market are patent-infringement liability insurance for firms, as potential patent infringers, and patent-enforcement issuance for patentees.[24] However, patent insurance has not been completely accepted by the market: the insurance coverage accumulated only 0.27 billion RMB between 2012 and mid-2015.[25]

Innovators expect monopoly rewards for their innovation.[26] However, some scholars argue that innovators cannot be directly rewarded or compensated enough because their trade secrets related to the patents are more likely to be explored by their rivals through reverse engineering when they disclose the technology of the patents.[27] More scholars believe that innovators have strong perspectives on commercializing and improving their innovation after the monopoly rights exist.[28] In addition to selling the patented products and generating revenue, licensing patents for expanding commercialization of products or co-inventing is also a critical measure that patentees use.[29] Meanwhile, firms can license universities, public research institutes, or other firms for joint-R&D to share risks and profits, rather than independently develop technology.[30] The statistics by SIPO show that smaller firms are more likely to license or transfer patents.[31]

There are patent agencies, such as CHOFN, and specialized patent transaction platforms that supervise patentees to transfer or license patents. Gaohangip is the largest intellectual property transaction platform, which is like Amazon, where patentees can put their patents up for sale. Patentees or Gaohangip lists the patents along with their prices, which are available to be searched by interested licensees for potential patent transactions. Gaohangip functions as an agent and provides legal services for the patent transfer.

However, the statistics by SIPO show that in 2015 only 8.2% of patents were licensed by patentees and 5.2% patents were transferred,[32] suggesting an insufficiency in the business of patent transaction and patent transfers, as discussed in Section III.

III. Analysis

A. Difficulties for Patent Transaction

Out of the total firm patent owners surveyed, 62.1% believe that the major restriction of their profitability is that they cannot effectively prevent others from imitating the patents.[33] On one hand, regardless of the arguments over the strength of patent protection in China, this relates to the low quality Chinese patents that are less competitive. On the other hand, this concern suggests a mixed culture of copycat and innovation in China,[34] in which the competition increases as the follow-on innovation and downstream innovation raises in the market. In this increasingly competitive market, moral hazard of patent transactions arises and grows too big to ignore because those licensed patents and any potential patents from the patentees are more likely to be circumvented.[35]

As a result, when the innovation ability of the licensees is high, patentees are less likely to transfer their valuable technology to avoid increased competition.[36] Patentees may agree to transfer core technology only if the license includes a grant-back clause so that patentees are allowed to freely use further inventions by the licensees.[37] However, given the low transaction rate, the moral hazard issues are not successfully mitigated in practice.

As a result, only 9.4% of the surveyed firms license patents or buy patents from domestic or foreign inventors.[38] Out of the total number of firms surveyed, 19% invest R&D mainly in digesting the existing technology, while 54% invest R&D mainly in technology transformation.[39] Even though firms are interested in purchasing technology instead of investing in learning, in this moral hazard scenario, licensing patents per se are not enough to learn core technologies from the patentee. This is also a challenge for third parties to successfully bridge the parties in patent transactions when both sides do not have strong incentives to make a deal given the high cost of moral hazard.

While it is convenient to purchase and sell patents through an agency or a platform like Gaohangip, the agency or platform usually does not facilitate licensing. Those agencies and platforms usually only facilitate drafting legal documents after parties enter into a patent transaction; they do not help with bargaining for the agreement. Bridging the parties of patent transactions through those platforms with basic legal services effectively decreases the searching costs, but they cannot fill the moral hazard gap in patent transactions.

B. Difficulties for Patent Financing

Patent validity in China is stable: SIPO only received 3,724 invalidity petitions including utility patents, utility models, and design patents.[40] With regard to litigation, the district courts in Shanghai decided 526 patent cases between 2002 and 2015.[41] Only 15.97% of plaintiffs argued patent invalidity, while only 2.85% of third parties argued patent invalidity.[42] Even though 20.7% of the plaintiffs in Beijing argued patent invalidity, for 487 patent cases between 2004 and 2015, only 2.04% patents were invalidated by courts.[43]

Nevertheless, this low invalidity rate does not provide patent owners strong incentives to purchase patent insurance. They try to avoid litigation when they claim the insurance and when they do not have strong confidence in their patents’ validity.[44]

Therefore, the low patent invalidity rate does not mean a high quality of patents in China. Indeed, lenders still hesitate to adopt patents per se as collateral. Bank lenders usually ask for a loan guarantee in addition to patent collateral,[45] and they even prefer a combination of patent collateral, insurance, and guarantees to minimize risks.[46] A loan guarantor in this circumstance is usually provided by the government or a government-funded mutual fund or incubator.[47]

Due to the high and complex thresholds, patent owners still have material difficulties in securing finance through loans. The survey by SIPO shows that 45.3% of the firms that own patents rights complained about cash flow problems that can lead to a failure to finance patent commercialization.[48] This could also be a result of the inevitable high cost of moral hazard in the loan market for patents. Weak patent enforcement[49] in this litigation-averse society[50] exacerbates moral hazard issues. These issues cannot even be mitigated by an emerging market of patent valuation in China, in which lenders can estimate patent value through economic analysis by patent valuation institutes.[51]

C. Paradoxes in Promoting Patent Transaction and Financing by Policies and Patent Law

1. Policies that Promote Patent Transaction and Patent Financing

In order to encourage patent applications and minimize the transaction costs in patent transactions and patent financing,[52] both the central government of China and the local governments have adopted various favorable policies for patent applicants, patent holders, and patent service providers, [53] such as the patent transaction platform—Shanghai United Assets and Equity Exchange.

Patent issuance in China was initiated by SIPO and the People’s Insurance Company of China (PICC).[54] Meanwhile, local governments subsidize patent insurance to encourage the innovation firms to purchase the insurance.[55] For patent collateralization, local governments actively provide interest subsidies or guaranties to facilitate innovative firms to acquire loans.[56]

The government also actively intervenes in patent applications and patent management by firms. SIPO supervises local governments’ training for firms on patent management and patent strategies.[57] Local governments provide subsidies and grants to fund firms to apply for patents and establish a patent management department.[58] Many local governments also subsidize patent agents to improve the quality of patent applications.[59]

Most of the policies are enacted through economic instruments to decrease the transaction costs in patent applications, patent transactions, and patent financing. However, even though the government can subsidize the application cost with SIPO, those current economic instruments cannot fully offset the cost of moral hazard that arises from the issues like low patent quality, weak patent enforcement, and the copycat culture. Indeed, Chinese patent law is designed to prohibit patent transaction and patent financing to some degree.

2. Increased Cost in Patent Transaction and Financing by Patent Law

I am the first to argue that there are two main articles in Chinese patent law that could impede innovation commercialization, including patent transaction and financing. First, Article 24 limits the scope of publication before the effective filing date of a claimed invention: the six-month grace period for novelty is only for the inventions that are disclosed in the exhibitions hosted or approved by the Chinese government, published at a specified academic or technological conference, or divulged by a person without consent by the applicant.

The exceptions of lack of novelty in 35 U.S.C. 102(b) regulating the one-year grace period does not restrict the manner of publications, including patentees’ sales and uses before the filing date, so inventors can test their market and consumers at an early stage.[60] Moreover, Japan even has an Extensive Experimental Use Doctrine, which is not limited by a grace period, which helps with the understanding of the advanced technology and assisting with faster investing decisions.[61]

By contrast, Article 24 does not only provide a shorter term for inventors understanding the advancement of technology, but also does not provide a chance for inventors to test the market and consumers. Therefore, it is not surprising to observe deficiencies in innovation commercialization in China. Some patents may not have commercial value at all, but the law does not allow patentees to understand the practice before they file the applications.

Second, Article 69(2) defines broad prior user rights. While western scholars often argue that trade secret owners should have relatively narrow prior user rights to promote innovation,[62] prior user rights are relatively broad in China. “Prior” means the time prior to the patent filing date rather than the publication date or the beginning of the grace period as under U.S. patent law.[63] The scope of “user” is also vague, which could suggest a person who has manufactured identical products, utilized identical methods, or is fully prepared to do so. Article 69(2) does not mention a person who conducts an arm’s length sale or other arm’s length commercial transfer or uses with respect to the technology, which confuses many judges and legal scholars in China.[64] Accordingly, Chinese patentees, most of whom are follow-on inventors rather than initial inventors, may be unwilling to enforce their patents since they do not know whether the infringers are excluded from patent infringement for prior user rights that may also threaten their patent validity for lack of novelty.[65]

Overall, these two articles include an underlying notion that patents should be filed at an early stage. As the government provides many subsidies and grants to encourage patent applications, it is not surprising to observe a dramatic increase of patent applications and a strengthening mechanism of patent agencies in the recent years in China. However, the law may also raise the cost of patent commercialization, patent transaction, and patent financing. In this patent regime, it is hard to accurately estimate the patent value, so lenders cannot completely rely on patent valuation reports to adopt patents per se as collateral. Firms also hesitate to license patents or conduct joint-R&D with potential licensees.

VI. Recommendation: Opportunities for Third Parties

The most solid business of patent service in China is patent procurement, which assists inventors in drafting and applying for patents. Both the market demand and the government support are great in this area. Even though the government heavily funds patent commercialization, patent transaction, and patent financing, the limited technology value, the culture of copycat and litigation-aversion, the strength of patent protection, and the design of some articles in patent law are the main barriers to conquer. These barriers increase the cost of moral hazard in patent transactions and financing when the government instructs inventors to file more patents, and manage and commercialize their patents through subsidies and grants. While there are agencies or platforms bridging patentees and potential buyers or licensees, the decrease in the transaction costs does not effectively eliminate the high cost of moral hazard when bargaining for an agreement.

Also, this cost cannot be reduced when the government directly or indirectly provides guaranties for patent loans. These guaranties from third parties are used as substitutes for patent collateral rather than as supplementary to the patents. Loans are offered for those guarantees or other financing packages in the name of patents, which shifts the risk burdens to those third parties. Even though there are institutions evaluating patents’ economic value and even though SIPO provides patent evaluation reports for patents’ validity, lenders who ask for financing packages in addition to patent collateral do not completely rely on these reports. Then, we cannot conclude that these reports are enough to eliminate the risks for those third parties.

V. Conclusion

Even though China has emerged as the country with the largest number of patent applications, there are material difficulties for Chinese patentees to commercialize, transfer, license, or finance their patents. As the business of patent procurement and other supplementary service of patents grows, the market demands more third parties to fill in the gap effectively reducing the moral hazard to promote patent transaction and patent financing, such as promoting joint-R&D, facilitating inventors to improve patent quality, educating patentees to license their patents at an early stage, establishing reliable patent quality evaluation mechanisms, efficiently managing patent licenses, or monitoring the follow-on activities of licensees or patentee lenders.

* Post-Doctoral Research Associate & J.S.D., University of Illinois College of Law. I thank professor Thomas S. Ulen and Professor Jay P. Kesan for cultivating the ideas of this Paper, Carlos Delvasto Perdomo for his suggestions, and Zishu Wang and Samuel Branum for the editing.

Intellectual property is considered by some to be the largest asset class in the world. Intellectual property assets in the United States were recently estimated at $5.5 trillion.[1] Despite this huge estimate of intellectual property assets, not all of these assets are being effectively utilized. In fact, in the United States alone, it is estimated that “a staggering $1 trillion” is wasted in underutilized patent assets.[2] In order to help exploit some of these unused resources, a new exchange called the Intellectual Property Exchange International, Inc. (IPXI) has been created.[3] The basis of IPXI is to allow IP owners to list their IP on an open market where licenses can be bought and sold freely.

I. How IP Owners Have Exploited Their Assets in the Past

Prior to the creation of IPXI, there were several ways one could take advantage of IP assets through licensing. The most traditional methods were bilateral licenses and compelling a license through court proceedings. These options have certain challenges or weaknesses that IPXI attempts to remedy.[4]

A. Bilateral Negotiations for a License

Negotiating a license with a potential licensor is one of the most common ways IP licenses come about. Generally this requires a company to identify a particular potential licensor and negotiate a license with it. This can be difficult or troublesome for several reasons. First, corporations often discover potential licensors by identifying potential infringers of their IP. It is often not easy to negotiate a license with an entity that feels accused of appropriating IP. Second, there are numerous steps involved for an entity that seeks to enter into a bilateral license. When seeking a license, negotiating with every potential infringer takes significant time and effort.[5] This increases transaction costs from a hypothetical market-based scenario where anyone could take licenses at a market-determined rate.[6]

B. Compelling Licenses Through Litigation

The next traditional way IP licenses occur is compelling a license through litigation. There are several issues with this method. Similar to the first method, the litigation route requires one to sue a single infringer at a time, greatly increasing the amount of effort to get an entire market to respect an IP asset. Next, litigation has significant risk. By suing a potential infringer, there is risk of not procuring a license. Worse still, one may have to take a compulsory license based on any counterclaims from the other party. Additionally, a court may find that a particular IP asset is invalid and the value of the asset may be lost completely.

Finally, the top reason to avoid seeking a license through litigation is the huge cost of litigation itself. In 1992 U.S. dollars, the mean cost including trial for a patent suit with $1 to $25 million at stake is $2.10 million.[7] In addition to the cost of litigation expenses, the opportunity and business costs of participating in litigation can cost parties even more.

II. How IPXI Aims to Help IP Owners Better Monetize Their IP

IPXI’s top goal is to create an open marketplace where buyers and sellers of patent licenses can easily come together to reduce transaction costs and other difficulties present in the current IP licensing market. It hopes to create an exchange where licenses can be bought and sold in an open market that will remove barriers to trade.

A. ULR Contracts

In order to facilitate a marketplace for patent licenses, IPXI has created a unit license right contract, or ULR contract.[8] A ULR contract generally consists of a non-exclusive license for a single patent, or several grouped or pooled patents.[9] In this manner, IPXI intends to list on its exchange patents or groups of patents that most easily facilitate the use of an entire technology or invention, not just of a single patent.

The ULR contract is also different from typical licensing and royalty arrangements. Traditionally, most royalty arrangements negotiated between two parties agree on a particular royalty rate that should be paid each time the technology is used. In this arrangement, the licensee pays the licensor the predetermined rate every time the technology is used. ULR contracts are designed differently. A ULR contract gives the purchaser the right to use the patent for a future one-time use of the technology.[10]

For example, a telecommunications company may list on the exchange a patent for a particular cell phone technology. If another company would like to utilize the technology in a cell phone, it must purchase ULR contracts through the exchange. If the second company wants to make 200,000 cell phones using the technology, it must purchase 200,000 ULR contracts through the exchange. Each time the company builds one of the cell phones with the patented technology, one of its 200,000 ULR contracts is exhausted. In this arrangement, each ULR contract is preserved until actually used. As a result, if the company fails to exhaust all 200,000 ULR contracts it had purchased, it can in turn sell unused ULR contracts on the exchange. When you have multiple parties buying and selling ULR contracts, something resembling a marketplace for patent licenses can be conceived. IPXI’s hope is that this will create a robust resale market for ULR contracts.

B. How a ULR Contract Makes It to Market

The first step IPXI has contemplated before listing IP in its exchange is a vetting and valuation process. IPXI will first internally assess the quality and validity of the IP that is to be listed.[11] This is an important step because IPXI is likely not interested in listing IP that will not have buyers or IP that could be easily invalidated. This process will include some evaluation of the potential market for the IP. It will also include a validity evaluation which can include prior art searches, review of the file history of a patent, and review of the patentability requirements in light of the particular patents at issue.

The next step, pending the IP makes it through the first round of evaluation, is approval by a selection committee. The idea of the selection committee is to have market or industry leaders sit on this committee and independently assess the viability of the offering.[12] If the selection committee thinks the IP is worthwhile, the vetting moves on to the next step in the process.

This next phase utilizes external parties to check the IP for validity and value. This will include valuations and validity determinations.[13] Also during this phase, the potential listing will be described and publicized for any members of the exchange to comment on.[14] After a certain period of time to collect comments and perform the further validity and valuation checks, the selection committee will review all the assembled information for a final assessment.[15]

Once the IP is approved for an offering, the IP owner must pay IPXI a fee to fund marketing for the IP and for other activities to make the IP ready for an offering as ULR contracts.[16] Through this process, IPXI will come up with an “Offering Memorandum” that details what IP will be offered, how many ULR contracts will be offered in the initial offering, and at what price the ULR contracts will be listed.

IPXI has developed a unique approach for auctioning off approved IP, which it hopes will best induce an accurate market price for ULR contracts. By utilizing an initial offering and subsequent offerings, it hopes to stimulate demand for the ULR contracts and get a more accurate market price for the IP. Although an asking price for the initial offering will be determined during the approval process, IPXI will conduct the initial offering as an auction. In this auction there will essentially be a minimum number of ULR contracts that must be sold at a certain price (essentially a reserve price). “By setting an asking price for ULR contracts and lowering that price until bidders are willing to accept a minimum number of offered ULR contracts, the Dutch auction method determines an initial offering price based on market input.”[17]

Whatever rate the first offering of ULR contracts is sold at, IPXI plans to list the next offerings of ULR contracts at a relatively higher rate.[18] This is to help stimulate demand during the first offering. Ideally, this higher price of subsequent offerings of ULR contracts will entice buyers to use the secondary market for procuring ULR contracts. Additionally, IPXI hopes this will stimulate organizations other than technology producers to buy ULR contracts. “IPXI contemplates that ULR contract futures and derivative products also will be developed.”[19] IPXI hopes that this system brings about several advantages over the old methods for licensing.

C. Potential Advantages of IPXI

The transparency and efficiency with which IPXI operates will offer corporate management the opportunity to make better business decisions regarding their IP. IPXI will offer license rights with standard terms at market-based prices. As a result, licenses are available to parties that normally wouldn’t have the ability to negotiate a license.[20] This increases demand for the technology, benefitting the licensor while keeping prices low for the licensee.[21]

IPXI also has the potential to greatly reduce transaction costs associated with previous methods of licensing, such as bilateral licenses. It also reduces prejudices that may exist within a market between two market players that would impact license terms. IPXI aims to offer identical terms to any potential licensee in a transparent way, which allows the market of licensees to be larger than it could be otherwise.

Another potential benefit for the licensee is that only a small number of ULR contracts need to be purchased, which may be helpful in covering the needs for “research and development, limited product releases, and the like.”[22]

Finally, IPXI could help remedy some of the larger issues plaguing the United States patent system. These include patent trolls, the “patent thicket,” and rising costs of patent litigation.

D. Challenges Facing IPXI

The biggest challenge IPXI will face is finding buyers for the IP offerings. Patents are inherently unstable assets that can be invalidated in court. Further, parties often disagree about whether infringement actually exists or not. This could make implementing an exchange for patent licenses very difficult.

The next challenge for IPXI will be finding high quality IP that will sustain a marketplace. Patents expire and technology moves quickly, so taking advantage of IP rights often needs to be done quickly and efficiently. It is unlikely that companies will be willing to list IP on the exchange that is part of their core business. As a result, IPXI will be dealing with “leftover” IP to a certain extent. IPXI must be able to sift out the worthless IP and exploit the valuable IP they come across.

A final difficulty IPXI will face is how to structure its procedure for dealing with infringers of the patents listed on its exchange. One of IPXI’s goals is to reduce litigation and increase licensing. But if litigation must be used as a last resort, IPXI must determine how the litigation should proceed and how it will be funded. If parties are pooling patents these arrangements can get very complex, and IPXI would do well to develop a procedure for dealing with infringers.

III. Conclusion

IPXI is an exciting new entity that has the potential to significantly change the face of the IP marketplace. Despite significant hurdles, IPXI is poised to help create a better true market for patents and increase transparency and predictability in such a volatile sector of the law.

[*] J.D. Candidate, University of Illinois College of Law, 2013. B.S., Electrical Engineering, Olivet Nazarene University, 2008. I am incredibly grateful to Jeff Charbeneau and Dr. Robert Sanders for their invaluable assistance in helping me develop this topic. I would also like to thank the editing staff of the Journal of Law, Technology & Policy for all of their contributions to this article.

[6]See Gray, supra note 4, at 5 (discussing how the ULR program can reduce transaction costs).

[7] James Bessen & Michael J. Meurer, Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk 132 (2008). The cost for a similar suit through discovery is $1.20 million. The mean cost including trial for a patent suit with more than $25 million at stake is $4.14 million. The cost for a similar suit through discovery is $2.59 million. Using a different metric, the mean legal costs for a patent owner in an infringement suit that goes to trial is $1.20 million, and $1.10 million if summary judgment is granted. Comparatively, the mean legal cost for an alleged infringer in an infringement suit that goes to trial is $2.85 million, and $0.66 million if summary judgment is granted. All numbers presented here are in 1992 U.S. dollars, so the current costs are likely much higher. Id.

Under the United States Patent Act, “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.”[1] A finding of willful patent infringement allows the court, at its discretion, to “increase the damages up to three times the amount found or assessed.”[2] While a finding of willfulness is a sufficient basis for awarding enhanced damages, it does not compel such an award.[3] Additionally, the court may award reasonable attorney fees to the prevailing party for willful infringement.[4]

Willful infringement significantly affects the technology that patents protect. In the recent high-profile Apple v. Samsung trial, the patents at issue concerned smartphones and tablets. The San Jose, California nine-person jury found that Samsung infringed six of seven Apple patents.[4] The jury awarded Apple $1,049,393,540 in damages—one of the largest awards in an intellectual property case to date.[5] Moreover, the jury found that Samsung willfully infringed on five of six Apple patents. Thus, presiding Judge Koh can grant Apple’s request to treble the $1.05 billion jury award and to award attorney fees under 35 U.S.C. §§ 284, 285.

II. Background

The Court of Appeals for the Federal Circuit articulated a standard for evaluating willful infringement in Underwater Devices, Inc. v. Morrison-Knudsen Co. “Where . . . a potential infringer has actual notice of another’s patent rights, he has an affirmative duty to exercise due care to determine whether or not he is infringing.”[6] The affirmative duty of a potential infringer included, inter alia, the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity. Ensuing case law shaped the willfulness landscape and evaluates willfulness under the totality of the circumstances.

III. Seagate’s Willfulness Standard

Twenty-four years later, the Federal Circuit overruled Underwater Devices and established a two-prong test for proving willful infringement in In re Seagate Technology, LCC. First, “a patentee must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent.”[7] This first prong is a threshold objective standard in which the state of mind of the accused infringer is not relevant. If the threshold objective prong is satisfied, the patentee must also demonstrate the second prong: “that this objectively-defined risk (determined by the record developed in the infringement proceeding) was either known or so obvious that it should have been known to the accused infringer.”[8] This second prong is a subjective inquiry. The Court left the development and application of Seagate’s willfulness standard to future cases. Subsequent case law established that the objective prong tends not to be met where an accused infringer relies on a reasonable defense to a charge of infringement.[9] Examples of defenses that negate the objective prong of willfulness include invalidity and noninfringement assertions.[10]

Seagate significantly altered two aspects of the willfulness landscape. First, itelevated the previously lower threshold for establishing willfulness. Seagate moved away from Underwater Device’s affirmative duty of care—which was akin to negligence—and adopted a more rigorous objective recklessness standard. The Federal Circuit reasoned that a higher standard of recklessness permitting enhanced damages comports with Supreme Court precedent requiring a showing of recklessness before civil punitive damages are allowed.[11]Seagate’s heightened standard has made it more difficult for a prevailing party to recover enhanced damages.[12]> Second, resulting from Seagate’s abandonment of an affirmative duty of care, potential infringers are no longer required to obtain opinion of counsel in order to avoid liability for willful infringement.

IV. Willfulness As a Question of Law

Under Seagate precedent, the willfulness two-pronged inquiry has long been treated as a question of fact.[13] On June 14, 2012, the Federal Circuit once again transformed the landscape of willfulness by announcing, in Bard Peripheral Vascular, Inc. v. Gore & Associates, Inc., that the threshold prong is henceforth a question of law. The Bard Court held, “the objective determination of recklessness, even though predicated on underlying mixed questions of law and fact, is best decided by the judge as a question of law subject to de novo review.”[14] In Bard, the Federal Circuit delineated a rule for two distinct circumstances. When a defense or noninfringement theory asserted by an accused infringer is purely legal, the objective recklessness of such a theory is a purely legal question to be determined by the judge. Such purely legal defenses include claim construction and reexamination. Alternatively, when the objective prong turns on fact questions or on legal questions dependent on the underlying facts, the judge remains the final arbiter of whether the defense was reasonable, even when the underlying fact question is sent to a jury. Such underlying factual defenses include anticipation or obviousness. Under the second circumstance, if the defense is a question of fact or a mixed question of law and fact, the court may allow the jury to determine the underlying facts relevant to the defense first, and then it would determine the reasonableness of the defense as a matter of law.

The Bard Court reasoned that the judge is in the best position to determine whether an accused infringer’s defenses are reasonable.[15] Furthermore, judges have the discretion to award enhanced damages and attorneys fees for willful infringement; therefore, it is logical for judges also to decide the objective prong of willfulness. To support its holding, the Bard Court also relied upon the Supreme Court’s conclusion that objective baselessness should be a question of law through analogizing objective baselessness for sham litigation to a finding of lack of probable cause to institute an unsuccessful civil law suit—which subjects mixed questions of fact and law to a de novo review. Bard extended the Supreme Court’s analogy to encompass objective recklessness because Seagate’s objective recklessness and objective baselessness are identical under Federal Circuit precedent.

V. Bard’s Effect on the Willfulness Landscape

This most recent change to willfulness as a question of law substantially affects the overall willfulness landscape in two respects. First, a question of law is determined by the court, either on a pretrial motion for partial summary judgment or on a motion for judgment as a matter of law at the close of the evidence.[16] Prior to Bard, few of these motions were granted because willfulness was ultimately a question of fact to be decided by the jury after trial. Now that willfulness is a question of law, an avenue is created for disposing of willfulness allegations by judicial decision prior to trial. Therefore, courts will likely experience increased filings of such motions due to this new avenue, and movants likely will experience greater success—not necessarily on the merits of the motion but on the sheer ability of courts to grant the motions without needing to submit the issue to the jury.

Secondly, the decision in Bard creates a disjointed pairing of a question of law with a standard for proving facts. Seagate requires that the threshold prong of objective recklessness be proven by clear and convincing evidence. Typically, clear and convincing evidence is the standard for proving questions of fact, which was consistent when willfulness was a question of fact. In holding that the threshold prong of objective recklessness is a question of law, the Bard court failed to address or change the standard of proof required for this prong. Thus, Seagate and Bard, understood together, create an issue of law that still must be proven by the standard for an issue of fact.

In an earlier concurring opinion, Justice Breyer addressed the exact problem we now face with Seagate and Bard.[17] Justice Breyer, in his concurring opinion in Microsoft Corp. v. i4i Limited Partnership, firmly stated that the clear and convincing evidentiary standard should only apply to questions of fact and not to questions of law. Additionally, Justice Breyer instructed courts to prevent “the ‘clear and convincing’ standard from roaming outside its fact-related reservations . . . .”[18] One does not have to make a significant inferential leap to conclude that Justice Breyer would admonish the Federal Circuit for establishing willfulness as a question of law that applies the clear and convincing evidence standard of proof. Although both remain “good” law, there is undeniable tension between Seagate and Bard that will likely be addressed in subsequent case law.

VI. Conclusion

The willfulness landscape has undergone two significant changes within the last five years. First, the willfulness standard in Underwater Devices was replaced by the standard set forth in Seagate, which heightens the burden of proving willfulness by requiring objective recklessness as opposed to negligence. Additionally, Seagate abandoned Underwater Devices’ duty of care and duty to seek opinion of counsel. However, no change could be more significant than the change that occurred in Bard, whichheld that willfulness is as a question of law rather than a question of fact. As a question of law, judges may determine the threshold prong of willfulness without submitting the issue to the jury. The judge could dispose of a willfulness allegation by granting a motion for summary judgment or judgment as a matter of law. Thus, the authors posit that the courts will see an increase in such motions, and movants will experience greater success solely because of the new avenue to dispose of willfulness allegations. Another effect of the change in Bard is the tension created by joining a question of law with the burden of proving a question of fact—clear and convincing evidence. The authors posit that Justice Breyer would strongly disapprove of such joining based on his special concurrence in i4i, and the tension will be resolved in subsequent case law.

* J.D. Candidate, University of Illinois College of Law, expected 2013. B.A., Mathematics and Philosophy, University of Saint Thomas, 2010. Firstly, I would like to thank James Hanft at Schiff Hardin LLP for his insights and guidance during the 2012 summer associate program, which sparked my interest in this topic. Secondly, I am grateful to the editors of the Journal of Law, Technology, and Policy for their support while writing this piece. Lastly and most importantly, I would like to thank my family for their continued support throughout the years.

** J.D. Candidate, University of Illinois College of Law, expected 2013. B.S., Finance and Information Technology, Marquette University, 2010. Firstly, I would like to thank my co-author for introducing me to this topic and being a pleasure to work with. I would also like to thank my fellow Journal of Law, Technology, and Policy editors and members for their insights and advice throughout the writing and publication process. Lastly, I would like to thank my family for their encouragement of my legal education.

[12]See Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 71 (2007) (noting that a reckless disregard of a requirement of the Fair Credit Reporting Act would qualify as a willful violation that makes a person civilly liable to the consumer).